Claims Trading

The sale or transfer of a claim in bankruptcy from one party to another. Normally, claims trading is designed to result in a short-term profit for the purchaser based on the gamble that the bankruptcy estate distribution will exceed the price paid for the claim. The recent explosion of claims trading has transformed Chapter 11 in many ways. Increasingly claims are being acquired as a strategy to participate in the plan process, to acquire a plan blocking position, or gain control over a debtor. But see DISH Network, 634 F.3d 79 (2nd Cir. 2011), where the Second Circuit Court of Appeals upheld a bankruptcy court finding that a secured creditor’s vote lacked “good faith” and disregarded that vote for purposes of confirmation, concluding the secured parties motive in purchasing the claim and voting was to “obtain a blocking position,” “to control the bankruptcy process for this potentially strategic asset,” and “acting with an interest other than an interest as a creditor” was the sort of behavior Bankruptcy Code Section 1126(e) was designed to protect against.

Generally, a claims transferee is entitled to the same rights as the transferor. The bankruptcy court’s prior approval is not required to transfer a claim, but the Federal Rules of Bankruptcy Procedure require filing by the transferee of a notice of the transfer except in the case of publicly traded debt securities.

See Federal Rules of Bankruptcy Procedure 3001(e).

See also Fulcrum Security.

Email Term